–Fed’s Policies Contributed To Stock market Rise
–Higher Interest Rates Due to Better economic Expectations
By Yali N’Diaye
WASHINGTON (MNI) – Economic growth and employment are firming and
deflation risks have “considerably receded,” Federal Reserve Chairman
Ben Bernanke said Thursday, adding that risks today are “somewhat more
balanced” than they were in August, when the central bank was concerned
about the sustainability of the recovery.
Back in August, he said during a panel discussion at a Federal
Deposit Insurance Corp. Forum on small businesses, risks “were
definitely to the downside and now I think they are somewhat more
balanced although there are many uncertainties.”
Bernanke defended the Fed’s policies, saying “one of the best
things we can do is try to strengthen the overall economy.”
He said the Fed’s policies have “contributed to a stronger stock
market.”
As for higher interest rates, “that is mostly because the news is
better,” he said, adding rates “have responded to a stronger economy and
better expectations.”
Looking ahead, Bernanke said he expects growth to strengthen.
“We see the economy strengthening,” he said. “It looks better in
the last few months and we think the 3-4% type of growth number for 2011
seems reasonable.”
That, however, “will not reduce unemployment at the pace we would
like it too but certainly it would be good to see the economy growing
and that means more sales and business for companies of all sizes,” he
added.
And as the economy grows, so will lending, he said, pointing out
that the latest surveys of loan officers indicate that tightening is
stopping.
FDIC Chair Sheila Bair, who was on the same panel, agreed that a
stronger economy will eventually translate into stronger demand for
loans from small businesses while enhancing their creditworthiness,
hence encouraging banks to lend.
Issues remain, however, and one of them is the ongoing weakness in
the housing market that raises the problem of loan collaterals.
For Bernanke, banks should not rely on the collateral when making
loans, at least until the real estate market recovers.
And that will “take some time.”
Still, loans should be extended only to creditworthy borrowers, he
said.
“You have to have a balance,” he commented. “We got in trouble in
the first place by making too many bad loans.”
Besides, argued Bair, while encouraging banks to lend, it is clear
than banks with a stronger balance sheet will do a better job at
lending.
“If you have troubled loans on the balance sheet you can’t ignore
them,” she said.
Asked what the Fed could do to help address the issue of loan
collateral, Bernanke said, “we are working hard on lots of different
fronts,” joking, “We bought a few mortgages, for example.”
He said the regulatory agencies have been trying to improve banks’
workout of troubled mortgages both residential and commercial. Still,
this is a long process.
“The economy has to come back, confidence has to come back, we have
to see higher utilization rates, more people can qualify for mortgages
and so on so it’s a slow process and that’s one of our key goals,”
Bernanke said.
The reform of the government-sponsored enterprises will also be a
key factor in the recovery of the housing market.
“Obviously the biggest problem in some sense would be Fannie and
Freddie reforms which have to come at some point,” Bernanke said, and
“which will be critical to reestablishing the soundness of the
residential mortgage market.”
There are also problems on the regulatory front, as businesses
remained concerned by the implementation of Dodd-Frank.
On that front, both Bair and Bernanke agreed regulators are trying
to be “sensible” and “balanced” in making rules that will work and that
won’t overly burden small banks.
“We should do everything we can to minimize regulatory burden on
the smaller banks which don’t pose any kind of systemic risk,” Bernanke
said, adding regulators are doing as fast as they can to implement
Dodd-Frank.
Both Bernanke and Bair agreed the regulation are primarily
targeting large institutions.
This is also true of the Basel III accord on capital standards,
Bair said.
Despite regulatory uncertainties and the ongoing weakness of the
real estate market, lending is improving, Bernanke said, noting banks
are strengthening and getting more capital.
“Deleveraging is slowing down,” he said. “Lending is starting to
improve.”
“My sense is we are at a position where we are starting to get some
improvement,” the Fed chairman said. “I think 2011 will be a better year
for small business lending and certainly the supervisors and the
monetary policymakers will support that.”
He said the survey of loan officers shows that there is “no more
tightening at this point.”
“Overall it is certainly a very tight situation but I think things
have stopped getting worse and are looking a little better and again as
the economy improves you would expect to see better lending going
forward,” he concluded.
And at the FDIC, “We think it is turning,” Bair agreed.
“I think there is a lot beyond our control, but if things continue
as they are it is slowly getting better and you will see that activity
picking up,” she said.
She later told reporters that she still believes 2010 was the peak
of bank failures, although they will remain “elevated” in 2011.
** Market News International Washington Bureau: 202-371-2121 **
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